A newsletter subscriber once asked me how the term “best value” is defined in procurement.
In procurement, best value is one of those terms that is defined differently by different people.
Best value in procurement, sometimes referred to as total cost of ownership, is a procurement methodology that considers many different factors other than just price, for instance, knowledge and experience. Total cost of ownership describes the method by which an organization measures its total cost of ownership relative to its revenue and compares that cost to its net profits over a given time period. Cost reduction through procurement can lead to cost savings, as well as improved profitability. To put it simply, the goal of best value in procurement is to reduce expenditures while increasing revenue.
Best value relates to systematically identifying a measurable monetary difference between a winning supplier’s proposal and all other suppliers’ proposals. The term implies that more than just price is taken into consideration.
Most commonly, the best value (also called “net profit impact”) is determined by completing a total cost of ownership (TCO) analysis. However, when suppliers’ work can impact revenue, revenue and cost are factored into an equation determining the best value/net profit impact.
Beware, though: I’ve seen government purchasing organizations use the term best value to mean that they’ve used a weighted average supplier scorecard to evaluate proposals based on several variables rather than just price. In these cases, no true TCO analysis nor profit impact calculation was performed.
If you are unfamiliar with TCO analysis or weighted average supplier scorecards, these topics are covered in-depth in our online classes “Finance for Strategic Procurement (Fundamentals)” and “Microsoft Excel For Purchasing Professionals,” respectively.
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